By J.R. Nyquist

On 13 July Congressman Ron Paul of the House Financial Services Subcommittee on Monetary Policy had an interesting exchange with Fed Chairman Ben Bernanke. “When you wake up in the morning, do you care about the price of gold?” asked Paul.

“I pay attention to the price of gold,” Bernanke replied. “The reason people hold gold is as protection against tail risk, really … bad outcomes. And to the extent the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.”

Paul then asked, “Do you think gold is money?” The Fed Chairman stared blankly for a moment, blinked, looked up and said, “No. It’s a precious metal.”  Paul interjected, “Even if it’s been money for six thousand years?” Bernanke then admitted that gold was an “asset” like Treasury bills. “I don’t think they’re money either.”

Paul then asked, “Why do central banks hold it?” Bernanke answered, “It’s a form of reserves.” Well, in that case, continued Paul, why don’t they hold diamonds? Bernanke stared blankly again, then said, “Well, it’s tradition. Long term tradition.”

Bernanke made the point that people are turning to gold out of fear. They use gold, he said, “as a protection.” This last comment was something of an admission about the state of the economy and the hazards of inflation. More and more people are losing faith in the existing currency (and the stock market), which means they are preparing for the worst. It might be said that the price of gold is a barometer that may be used to forecast an impending storm.

The Italian sociologist Vilfredo Pareto noted in Vol. III of his Mind and Society, “Money is an instrument of exchange…. But it is also an instrument for levying taxes without suspicion on the part of the public at large that it is being taxed….” If we were on a gold standard, the government could not debase the currency. There would be an absolute limit on expenditures because the country could not export its inflation, as the U.S. has done. For as it stands now, the United States can create dollars – as Ron Paul said, “out of thin air.” This is not something you can do with gold.

After World War II the global economy was constructed around the dollar. Trade relationships were built in dollars. Dollars had to be used in transactions around the world, which amounted to a hidden global tax, which other nations accepted because America guaranteed their security and their markets. In consequence of this, America has flooded the world with dollars. And only when the world becomes suspicious of the dollar, when prosperity is no longer associated with the American way, will the dollars come flooding back.

Everything now depends on the severity of the global downturn. If the economy continues to weaken, the dollar may lose its position. The United States could be blamed for a sick global economy. How much does the world believe in the dollar and the current global system? The system of international trade and security has long been justified on the grounds that it successfully delivered a degree of security and economic growth. What if it ceases to deliver?

The crisis has been coming for a long time, and involves a number of factors. Most obvious, of course, is what has happened throughout the developed world; namely, governments have spent too much money on social benefits and have run up enormous debts. A kind of addiction to deficit spending has taken hold on all sides – in Europe, Japan and the United States. “Such procedure occasions no serious difficulties in periods of rapidly mounting economic prosperity,” noted Pareto. “Natural increases in budget revenues cover the manipulations of the past…. The difficulties come in periods of depression, and they would be far worse if a depression at all protracted were to supervene.”

In that event, said Pareto, the social order would be compromised; especially since modern society is particularly volatile, lacking traditional cohesion. Today, under a rationalized bureaucratic order, Pareto argued that “no government could remain unaffected during such a period; and tremendous catastrophes might occur and in magnitudes far greater than any that history has hitherto recorded.”

Pareto was writing before the advent of atomic weapons, and before the social fabric succumbed to television and consumerism. Today people are increasingly isolated in a society that tends toward atomization. Decades of prosperity have made us more individualistic and less flexible in our dealings with others. As opportunity dries up, the existing system will find itself face to face with a mob of alienated, angry people.

In his book, The True Believer, Eric Hoffer wrote: “Hatred is the most accessible and comprehensive of all unifying agents. It pulls and whirls the individual away from his own self….” Hoffer argued that the fanatical hatred of a mass movement could “fuse and coalesce” people “into one flaming mass.” He warned that such movements “can rise and spread without belief in a God, but never without belief in a devil.” In other words, someone is going to be demonized. Hoffer then told the story of a Japanese delegation to Nazi Germany. They were asked what they thought of National Socialism. A Japanese observer replied, “It is magnificent. I wish we could have something like it in Japan, only we can’t, because we haven’t got any Jews.” 

The demonization of Jews was the formula of Nazism in the 1930s. There is reason to fear that the demonization of wealthy Americans may be developing as the formula for the present decade. If that is the case, the dollar’s demise will mark the beginning of a global transformation. “In human societies,” wrote Pareto, “as known in historical times, the producers and holders of savings are continually being robbed of them.” He added that this robbery is carried out through a variety of means: “by violence – war, plunder, individual assaults; or by trickery and deceit – special tax laws aimed at holders of savings; issues of fiat money and certificates of public debt that are sooner or later repudiated in whole or in part….”  

Historically, this sort of spoliation “takes place either in the form of catastrophes coming at long intervals … or in the form of developments recurring at briefer intervals, such as the losses inflicted on savers during ‘economic depressions.’” The stealing of vast sums from the wealthy occurs so frequently in history as to be normal. According to Pareto, people imagine that the catastrophes of earlier times cannot be inflicted on them. “That is just an illusion,” he wrote. “[because] they are, on the whole, as regular, as normal, as any other development in human society.”

Fiat money was specifically mentioned by Pareto as one of the devices by which wealth can be taken away. The French social thinker, Gustave Le Bon explained the process as far back as 1898. Whether the political banner of the politician is “progressive” or humanitarian, socialist or reformist, “All would have recourse to the state to repair the injustice of destiny, and to proceed to the redistribution of wealth.” Measures adopted would include the “confiscation by the state of capital, mines, and property, and the administration and redistribution of the public wealth by an immense army of bureaucrats.” Le Bon further predicted, “The least signs of initiative, individual liberty, or competition would be suppressed.”

Many have forgotten the extent to which property rights are linked to freedom. It may also prove the case that commodity money (i.e., gold) is linked to freedom, insofar as the abandonment of the gold standard leaves property rights open to attack. Yet, despite all this, nothing can really be done. In 1960Friedrich Hayek reminded his readers that “the functioning of the international gold standard rested on certain attitudes and beliefs which have probably ceased to exist.”